Shares of Starbucks (SBUX) are fresh off their best day ever, surging more than 25% in a single day after the Seattle-based coffee chain announced former Chipotle Mexican Grill (CMG) top boss Brian Niccol will replace Laxman Narasimhan as CEO in September. With a big name at the top and ample ground to catch up, Starbucks stock stands out as the ultimate comeback play for the next few years.
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Now that Starbucks has a leader who’s about as legendary as the great Howard Schultz, it should be no surprise to see the recent wave of analyst upgrades over the past week. In light of the transformative CEO change, I couldn’t be more bullish on SBUX stock, even after the 25% drop in price.
I think more price targets and recommendation upgrades could arrive as we come to terms with just how big a deal it is to have Niccol join the team. Starbucks is hoping to stage its most historic comeback to date.
A New CEO at the Helm
Outgoing CEO Narasimham wasn’t exactly a seasoned veteran in the restaurant industry when he took his position at Starbucks. Not to discount his stacked resume, which includes a wealth of experience in the upper ranks at Pepsi (PEP), but experience in a consumer-packaged goods firm just isn’t the same as having someone who knows the ins and outs of the quick-serve restaurant scene. The final straw, I believe, was the last two underwhelming quarterly earnings reports.
In April, SBUX stock tanked double-digits as the firm missed the mark by a country mile, clocking in earnings per share (EPS) of $0.68, well shy of the $0.80 analysts’ consensus. More recently, the firm followed up with a lukewarm third quarter that missed on EPS by a penny. Narasimhan may have been at the helm of Starbucks for less than two years, but there was certainly not much to show for the firm’s turnaround efforts.
Indeed, the unforeseen but much-applauded passing of the torch from Narasimhan to Niccol is a historic move that may mark the start of a historic turning point. In July, I outlined the likelihood that Laxman Narasimhan would be “shown the door” by year’s end, given a lack of performance and the stock’s trajectory.
After appearing visibly nervous in a sitdown with CNBC’s Jim Cramer following that rough second quarter, I felt Mr. Narasimhan’s days were likely numbered. At the time, the big question was who would take his spot.
Starbucks’ Hiring of Brian Niccol
As is evident, a big factor in my bullishness on SBUX is Niccol’s new appointment as CEO. Up until recently, it seemed likely that former CEO Howard Schultz would be coming to the rescue once again. While another tenure from the prestigious chairman would have probably been met with a rally, it probably wouldn’t have compared to the reaction to bringing on Brian Niccol from Chipotle. Indeed, hiring Niccol is essentially a best-case scenario.
Though Starbucks’ issues run deep (think of the operating challenges, brand affinity erosion, and long lines), they will take time to solve. However, Niccol is the right man for the job, and as he gets to work this September, I don’t think it will take very long before his impact is felt in the form of either better-than-expected quarters or for confidence with the forward-looking guide.
In a recent note, BMO Capital Markets analyst Andrew Strelzik said that Niccol “is an ideal fit for what ails Starbucks” and that his addition “brings instant credibility given his success in driving Chipotle Grill’s recovery.” I couldn’t have said it better myself. Niccol isn’t just a proven rejuvenator of troubled restaurant firms, he seems to know how to optimize and transform operations in a way few know how.
Can Niccol Repeat the Magic?
After clearing the air on Chipotle’s E. Coli crisis, he went full speed on digital, delivery, and loyalty. As they say, the results speak for themselves, with CMG stock increasing more than 700% since Niccol’s arrival. The big question is whether Niccol can repeat the magic he worked over at Chipotle and Yum! Brands’ (YUM) Taco Bell. I firmly believe he can pull off the hat trick at Starbucks.
It won’t be easy to fix all that’s wrong with Starbucks, as high prices and long lines push consumers to get their cup of Joe elsewhere. At the very least, there’s no food-safety crisis weighing on the firm. In any case, betting against Niccol has proven a losing bet, and I think it’ll continue to be a losing bet as more analysts warm up to the coffee giant.
At the time of writing, Starbucks stock’s 26.6 times trailing price-to-earnings (P/E) multiple could prove depressed, especially if Niccol can make a difference sooner rather than later. I think he’ll make a mark far quicker than many expect.
Wall Street’s Take on SBUX Stock
On TipRanks, SBUX stock is a Moderate Buy. Out of 27 analyst ratings, there are nine Buys and 18 Hold recommendations. The average SBUX stock price target is $86.26, implying a downside potential of 9.0%. Analyst price targets range from a low of $75.00 to a high of $100.00 per share.
Bottom line
Starbucks’ latest 25% surge may be just the start of something special. However, expectations of Niccol will be high from the get-go, as his track record speaks for itself. Hearing more specifics on how Niccol aims to turn the ship around will be interesting. Such clarity may be enough to jolt SBUX stock well before he can get the firm back on the earnings-beating track. To reinstate my position from the beginning, I am very much bullish on SBUX stock.
